Wednesday, March 12, 2008

Externalities 101: Cigar Smoke

To demonstrate a point in class today I brought in a cigar (not just any cigar, but a Dutch Masters Grape Flavored one, retail price $1.25). I told the class how I wanted to pay $2 for the cigar, but bought it for $1.25, so I gained 75 cents worth of surplus. So to enjoy the surplus I needed to light the cigar and smoke it. I took out my matches and asked if anybody cared.

Apparently, my students do not like the smell of Dutch Masters Grape Cigars. These negative effects experienced by students are called negative externalities, that is they didn’t buy or sell the cigar yet it had a negative impact on them.

In many places of work including my University, Towson, it is illegal to smoke. Standard economic theory suggests that instead of bans we should allow people the right to pay off other people to smoke (or pay people not to smoke). This works well if there are low cost to these types of payments. But, there is a benefit to these bans. Some NBERs papers suggest that smoking bans, lower smoking rates (here), which may improve public health, although it may increase teenage smoking (here), and certainly improves the odor fellow bar partons.

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About Me

I’m an Associate Professor of Economics at Towson University. I decided to start this blog to communicate with my students, friends, family, and colleagues about what I think is interesting in economics. Most of my own scholarly work has focused on economic development in Latin America and educational attainment. In my spare time I enjoy baseball, beer, cooking, coffee, and eating out. I live with my wonderful wife, Marie, and daughters, Sylvia and Dorothy in Silver Spring, Maryland. I hope you enjoy my blog.